Greenspan: Effective demand as weak as during Depression

Alan Greenspan, former Federal Reserve chairman
Greenspan: Economy 'not strong'   

The fact that the market is anticipating that the Federal Reserve will raise interest rates, yet the yields on the 10- and 30-year Treasurys are falling is an indication of how weak the overall global economy is, former Fed Chairman Alan Greenspan told CNBC on Thursday.

In fact, effective demand is extraordinarily weak, he said.

"The way I measure it, it's probably tantamount to what we saw in the later stages of the Great Depression," Greenspan said in an interview with "Closing Bell."

That said, he acknowledged "it's not anywhere near what the problems were back then but we haven't seen anything like that since then."

Alan Greenspan
Andrew Harrer | Bloomberg | Getty Images
Alan Greenspan

Greenspan, who served as Fed chair from 1987 to 2006, also called the overall economic data for the United States "not strong."

While the jobs growth has been very significant, there is evidence of weakened productivity, he said.

"That is a key statistic which tells how the economy is functioning."

On Friday, the Commerce Department will release fourth-quarter gross domestic product numbers.

"Everyone expects that the growth rate for the fourth quarter is going to be about 2 percent, which is a downward revision from the earlier version. And it may even be less than that," he said.

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He also blamed entitlements for crowding out savings, a critical aspect to investing, and crowding out capital investment.

"Capital investment is key to productivity growth. That has slowed down quite dramatically and productivity has followed right along," Greenspan said.

As for the central bank's performance, the former Fed chair said it is doing some things that work and other things that don't work.

"One which has worked and is working is the significant increase in the amount of purchases of securities on the balance sheet, not to induce lending on the part of the private sector, but to push rates down," Greenspan said.

That has resulted in rising P/E [price-earning] ratios, capitalization ratios in real estate and all incoming-producing assets, he said.

Greenspan's comments came on the heels of Fed Chair Janet Yellen's semiannual testimony to Congress, where she said there would be no interest rate hike for at least the next couple of Federal Open Market Committee meetings.

She also reiterated the central bank would not raise rates before it found confidence in the economic recovery.

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